Paved With Good Intentions Part I. The Curse of Job Protection

One way of telling one kind of justice from another or more precisely to find the decisive points on which one system of rules opposes another, is to look at the highly simplified maxims by which we characterise each for easy reference. Thus we rapidly realise that “To Each, His Own” must be referring to a rule system originating in property, the contract that defines what one person owes to another or is owed by another, and more generally the reciprocal accommodations between persons that form conventions. One version of this maxim could be expressed as “To Each, His Worth To Others”, a clear enough suggestion that market exchanges are to be regarded as the basis of just distributions.

A fundamentally different global maxim of justice, “To Each, The Same” calls attention to the kind of justice needed to satisfy the basic requirement of equality. There are however, a great variety of ways in which we can claim that equality is satisfied. “To Each, According To His Needs” is one; “To Each According To His Abilities, or To His Contributions,” or perhaps “According To His Merits” are others. Each of these criteria can freely vary with any observer’s judgment of what is needed, what is being contributed, and what is merited. This will be the case whether the observer is partial or impartial. Consequently, they must either be discarded as criteria of justice, or amalgamated into a single collectively chosen and collectively applied criterion. Tested and tried in this guileless manner, it becomes clear that the source of a set of rules of justice is, taken by and large, either individual or collective choice.1

In modern societies justice, whose source is individual, intermingles with the one that originates in collective choice. The latter, however, has the upper hand whenever the two clash with one another, and has been gaining ground for a long time, probably since the second half of the 19th century. It may be that this process is accelerating, despite the fact that in the last two or three decades the distribution of money incomes within each society has become more unequal, although more equal between different societies.

Creating a deadweight cost in the labour market

In the modern age, jobs take shape by agreements in two alternative ways, one in the sphere of individual, the other in that of collective choices. The former, in the common law tradition, is a set of agreements between buyers and sellers of labour laying down all the conditions of their exchange with sufficient rigidity to minimise subsequent disputes yet with some modest flexibility to allow for minor adjustments as time goes on.

The other way, originating in collective choice, lays down conditions of the exchange, such as wages, hours of work, description of tasks etc., to which buyers and sellers of labour may either agree or abstain altogether. These preconditions are either laid down by the government, or entrusted to labour unions who may act as principles rather than agents of the individual sellers of labour.

The underlying reason for moving agreements from the area of individual to collective choice is the deep conviction in the public mind that an individual seller of labour is intrinsically weaker than the buyer because the latter is typically a corporation with incomparably greater power than any single individual. This, of course, is not a cogent reason, for even if the bigger party could be credited with greater bargaining power the latter is rarely decisive enough to dominate the issue. More often, bargaining power is effective only under strict assumptions, such as the absence of competition, which renders it almost immaterial besides being conceptually nebulous. If Walmart tries to crush a shopper with its “bargaining power” by sharply putting up the prices of its groceries, the shopper and most other shoppers like her would quit it and go to shop at the nearest Dollar Store, exercising their “bargaining power” that is manifestly greater than that of the giant Walmart.

The effect of collective choice on exchange is, of course, not limited to that of the legislation (e.g. the closed shop) by which labour unions are mandated to act for employees. Legislation and regulation by governments act on the conditions of exchange directly as much as indirectly through their support of union bargaining. They act on minimum wages, retirement ages, the amount of wages that must be transformed into compulsory premiums for health, old age and unemployment insurance, which is a sort of “truck” by which employees are given part of their wage not in cash, but in kind. It is a grotesque, though perhaps unimportant result that thanks to this measures, the labour market is enriched with a “legal” wage or a “legal” retiring age, and no one insists on his right to an “illegal” wage (i.e. a wage lower than the legal minimum) or an “illegal” retiring age (i.e. to work past the legal retirement age) which might be an option for them in a truly free market.

Even if political expediency did not, genuine good intentions would drive collective choice to bias the regulations of agreements of the labour market thought to be in favour of the worker. This would result in sub-optimal equilibria whose effect is difficult to quantify. Where the effect must by any account be very large and is in all likelihood vast, is in the circumstances that are imposed on the termination of employment.

The well-intentioned desire to offset by rules and regulations the supposed weakness of the seller of labour is reflected by the remarkable asymmetry between the rights and obligations of the two parties when attempting to end their relations. The asymmetry is at its extreme in the Latin countries of Europe, but exists in attenuated form nearly everywhere. An ordinary labour contract can be ended by the employee without further ado except due notice. The employer, however, can only terminate it against a “legal” minimum severance payment and on condition that the dismissal is not contested as “unfair”. It would be “unfair” if the employer dismissed the employee because he wanted to replace him or her with an outside candidate whom he preferred for any reason. Nor could he justify the dismissal by the wish to reduce his labour force as long as his current operations were unprofitable. If the dismissal is contested but never the less maintained, a legal battle ensues whose duration may well be two years or more and end with a negotiated severance payment or with the reinstatement of the employee, with unpredictable effects on future morale in the enterprise. It may be added that labour courts are believed to be well-intentioned towards the plaintiff as being the underdog in any dispute. The cost of dismissing an employee of a modicum of seniority is jokingly said to be much higher than that of a contested divorce. It may easily exceed two year’s salary without counting such intangibles as stress and distress on both sides. It is a powerful deterrent to employing anyone and a high wall keeping the young unemployed, for in addition to their wages the employer must take account of the contingency that he may want or have to terminate their employment sometime in the future.

The cost of a contested dismissal, discounted by the relevant probabilities of alternative outcomes expected by the employer, stands as a contingent liability against the marginal employee. It is a cost the employer can avoid by not dismissing the employee in question. It is also the cost of the job protection imposed on the enterprise by collective choice and a colossal cost weighing on the economy as a whole that is made to run with a youth employment rate of 25% or more.

It should therefore cause no surprise that the labour markets equipped with the most elaborate and most generous job protection, show the greatest unemployment. Employers will tend not to restore their labour force as it is reduced by natural attrition. More depressingly, they will be very reluctant to recruit new entrants to the labour force being intimidated by the contingent liability that comes with them and that renders them far too expensive. The unemployment, of course, is not independent of the growth rate of the economy, but it is in any event much larger than it would be if their were no intention to protect existing jobs.

In today’s intellectual climate, it is almost impossible to argue that the desire to protect jobs does not spring from good intentions. In fact, as jobs become more scarce and more precious thanks to job protection itself, those who still have jobs continue to praise the policy as laudable and necessary and more insistently demand its continuation.